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Rupert Murdoch, chairman and CEO of New York-based News Corp., has built a fortune on the scandals of others. Now, at age 80, Murdoch finds himself at the center of his own ever-widening scandal, one that threatens his hold on the $40 billion global media empire he started building in Perth, Australia, a half-century ago.

Allegations that journalists working for Murdoch’s publications illegally hacked into the phones of the British royal family, celebrities and ordinary citizens are driving a series of government inquiries into Murdoch’s business operations and his newspapers’ relations with politicians and police. Murdoch and his son James, who heads the company’s British subsidiary, News International, were summoned to appear before a committee of Parliament on Monday to answer for the behavior of the company’s news operations.

“This is the most humble day of my life,” Murdoch told the Parliamentary panel. Near the end of his appearance, he was attacked by a comedian who attempted to hit Murdoch in the face with a shaving cream pie.

The rapidly evolving scandal has already cost Murdoch. Under pressure from negative public opinion, News International dropped its $12 billion bid for complete control of British Sky Broadcasting (BSkyB), a satellite television company. (News Corp. owns 39% of BSkyB.) It also closed the 168-year-old News of the World, Murdoch’s first British acquisition and the nucleus of the scandal. So far, a top Murdoch executive in Britain has been arrested and two high-ranking British law enforcement officials have resigned. Murdoch’s top U.S. lieutenant has also resigned, and the FBI is launching a preliminary investigation into whether the organization violated U.S. statutes. In a dramatic twist, a former News of the World reporter who was a source for a New York Times article about phone hacking last fall was found dead in his London home.

The scandal is also swirling close to British Prime Minister David Cameron, who has met 26 times with Murdoch news executives in his 15 months in office. Cameron had hired a former News Corp. executive as his communications director, and that individual has since been arrested in connection with the hacking scandal. Today, Cameron appeared before the House of Commons as part of an inquiry into his dealings with Murdoch.

“I don’t think we yet appreciate how bad it really is. As more layers of the onion get peeled back, the more serious this becomes,” says Wharton management professor John Kimberly. “The stain seems to be spreading rapidly.” No matter how far the scandal ultimately goes, Kimberly notes, it has already sent “shockwaves” through the worlds of journalism, politics and law enforcement that will lead to new thinking about the boundaries of a free and fair press.

According to Wharton management professor Lawrence Hrebiniak, the scandal could ultimately bring down Murdoch himself. “I have a feeling he’s going to be pushed out,” he says. “He might be able to weather it, but already the winds of change are blowing.”

‘Almost Hubris’

The son of a Melbourne regional newspaper publisher, Murdoch took control of the business at age 21 after the death of his father. He went on to become an international press baron with a flair for sensational tabloid coverage. In the United Kingdom, he owns The Sun, The Times and The Sunday Times of London, and started a satellite television system that later became BSkyB. In the United States, he acquired the 20th Century Fox studio and founded the Fox Broadcasting Company in the 1980s. He also created the Fox News Channel and owns TheNew York Post and The Wall Street Journal.

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Murdoch is well-known for his aggressive personal style and hard-charging business tactics. According to Hrebiniak, Murdoch’s personality is reflected in his company’s strategies, which are rooted in “power — almost hubris.” He notes that News Corp. sought not only to control the media industry, but also the politicians who could shape the overall business environment. “[The company] thought they could hack into [the phones of] celebrities or the royals and get away with it because [News Corp. was] big and powerful.” Wharton management professor Peter Cappelli suggests that it is not surprising that Murdoch’s businesses mirror his own character. “In an organization with a strong founder, that person’s individual beliefs and the decisions by people at the top really become quite intertwined,” he says.

Cappelli points out that journalism, in general, gives individuals more leeway to make judgments about how they do their work than in many other businesses. In an industry without clear written rules and procedures, corporate culture becomes an even more defining factor, according to Cappelli. “My sense is that the culture [at News Corp.] is one where, for good or bad, breaking norms is something that was reasonably tolerated and probably even celebrated.” Given the context, Cappelli says, the scandal may not be justified, but is at least “explainable. The Murdoch family’s role in management may be another factor shaping the organization, he adds, since family members in leadership positions often magnify the personal norms and values of the founder.

Wharton management professor Michael Useem says that while it is rare for corporate officials to ever explicitly direct employees to break the law, implicit messages within a company’s culture can create the right climate for individuals to cross the line between competitive and crooked. “The top person is vital,” notes Useem. “The tone starts at the top.”

The legal problems at News Corp. are not yet on a level of those that killed Enron, but are verging closer, Useem points out. “It is not life-threatening, but it is business changing. With all the fallout, Murdoch’s business has to change in significant — and unwanted — ways.” According to Useem, dropping the BSkyB bid and closing the News of the World are major concessions to crisis management. “I have to give them credit for biting two big bullets.”

Not a ‘Few Bad Apples’

In order to attempt to contain the crisis, the usually imperious Murdoch has offered apologies in the pages of his newspapers and has personally met with the family of Milly Dowler, a murder victim whose phone was hacked by the News of the World. The phone hacking scandal had been simmering for years, enraging celebrities, including Hugh Grant and Sienna Miller, who sought relief in the courts. However, it grew to new heights earlier this month when an investigative report in The Guardian detailed how the News of the World hacked into Dowler’s phone and deleted messages to make room for new calls to intercept. As a result, the investigation into Dowler’s 2002 disappearance may have been hampered, and the victim’s parents were given false hope that she might still be alive.

Useem praises News Corp.’s appointment of board member Joel Klein, a former New York City schools chancellor who headed the U.S. Justice Department’s antitrust prosecution against Microsoft Corp., to lead an internal investigation. Klein joined the company late last year as the head of News Corp.’s educational businesses. Useem wonders whether Klein may have been hired to help cope with growing legal issues.

Going forward, Useem recommends that News Corp. attack the roots of the scandal rather than attempt to explain the problem away as the work of a few “bad apples.” He suggests that the company follow the lead of other scandal-plagued firms, including Tyco and (the now extinct) Salomon Bros., that have cleaned out several layers of managers — whether they were involved in the company’s problems or not — in order to start fresh. Also, while Murdoch’s resignation would “make a dramatic headline,” Useem notes that the house-cleaning must go deeper than just the top rungs. News Corp. should “aggressively and swiftly” take actions that point toward changing how it operates, he says, and the company might want to impose new policies and create a strong code of ethics. More importantly, top managers should meet with employees throughout the organization to promote any new ethics code as a way “to say, ‘We’re not fooling around.'”

From a strategic perspective, companies in crisis need to understand they are receiving a “wake-up call” warning them that excessive attention to short-term gain often carries much larger downside risk, Useem says. He points to a study he participated in that indicates companies that are well-prepared for a big disaster, such as a tsunami or global financial meltdown, are those that have already weathered a difficult crisis. For example, after the Valdez oil spill, Exxon has taken strong measures to guarantee it will never face that kind of problem again. “Maybe in the long term, Murdoch and his top team will turn this crisis into an opportunity to transform the company so it can do what it should have been doing all along” to avoid the current scandal.

Old Sabotaging the New

Daniel Raff, a Wharton management professor, says News Corp. had pinned much of its U.K. strategy on acquiring the 61% of BSkyB it does not already own. With 10 million subscribers, BSkyB is poised to become even more dominant in the U.K. market. The deal envisaged News Corp. creating profitable bundles of products, including ordinary television, premier sporting events and newspapers. Compared to BSkyB, Murdoch’s newspapers are far less profitable. In the most recent quarter, cable operations accounted for 60% of News Corp.’s overall profit, up 25% from the same period in 2010. The publishing division made $36 million, excluding a charge for legal settlements — down $82 million from the prior year.

As the phone hacking scandal began to heat up this month, public outrage over the news gathering techniques at News of the World put government approval of the BSkyB deal in doubt. Finally, News Corp. was forced to withdraw its bid.

In effect, the more profitable, forward-looking part of the enterprise was sabotaged by the older, less profitable newspaper business, Raff points out. “It’s conceivable that this very 21st century media plan will be upset by the shady practices of the legacy parts of the media empire.” Raff adds that while the company may have been run by the Murdoch family and long-time loyalists, it does have a large corps of professional managers and, equally, shareholders who ought to have been concerned about corporate governance. If they had been more active, Raff suggests perhaps they could have helped prevent the conditions within the company that led to the phone-hacking debacle, which cost the company $6 billion in value in the two weeks after the latest revelations about the Dowler case were reported.

Raff says many actions by News Corp. and its subsidiaries “might raise eyebrows in corporate governance circles.” For example, in April, News Corp. paid $647 million to acquire the television production company owned by Murdoch’s daughter Elisabeth. Another sibling, Lachlan Murdoch, is executive chairman of the News Corp. board. The Murdoch family controls 40% of the company’s voting shares. “[News Corp.] resembles a private, family run company rather than a publicly held firm,” Raff notes. “This raises questions for big pension funds and any other fiduciaries holding major stakes, quite apart from whether there have been criminal matters.”

Indeed, the company’s second-largest shareholder, Prince Al-Waleed bin Talal Al Saud of Saudi Arabia, pressured the former chief executive of News International, Rebekah Brooks, to resign once the hacking scandal broke. “I will not accept dealing with a company that has a lady or a man [with] any sliver of doubt [about] her or his integrity,” he told the BBC. The News Corp. board continues to back Murdoch, who told members of Parliament he has no intention of stepping down and is “the best person to clean this up.”

Lasting Impact

Beyond the turmoil at News Corp., the scandal is also expected to have a lasting impact on the media business in Britain and potentially beyond, according to faculty and analysts. Brian Cathcart, a professor of journalism at Kingston University in London, points out that tabloid-style journalism in the U.K. has been a good business for the past 15 to 20 years, with readers enjoying salacious coverage eagerly served up by publishers. The business managed to flourish and transcend legal boundaries because of official reluctance to “tame” the abusive behavior at the risk of censoring journalists exposing worthy stories. Cathcart predicts Britain will make changes in the current 20-year-old legal structure that relies largely on self-regulation.

In addition, he says, authorities from all parties in the British political landscape are looking forward to journalistic reforms that may come as a result of the scandal. “They are quite pleased at the prospect … that they would no longer be slaves to Murdoch in the way they were,” Cathcart notes. Government will never be able to “cure” all journalistic abuses, he says, adding that cultural change is also likely as a result of the excesses that have come to light in the Murdoch scandal. “Journalists will always try to find the edges, and that’s a good thing. But this basic cynicism that rules don’t apply to journalists — that it’s just a dirty game — will go. I think the casualness about ethics will go, which is very healthy. It’s a big cultural change for British journalism.”